The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

India’s infrastructure push is the exception to the global norm. The government has decided to pursue a public investment-led growth strategy, even though it means going slow on fiscal correction. It’s an opportunity that rich nations, which can borrow far more cheaply than New Delhi, are missing.

A planned reduction in the fiscal deficit to 3 percent of GDP has been delayed by a year. Instead, Finance Minister Arun Jaitley promised in his annual budget to plough savings from cheaper oil into infrastructure. Roads and rail will be the big beneficiaries of a 26 percent boost to capital expenditure, the sharpest jump in five years.

There’s no question that India needs better infrastructure if higher growth rates are to be sustained. Yet some Western countries that are also in need of an upgrade can afford it a lot better. For governments in advanced nations, the cost of long-term borrowing is a fraction of the near-8 percent yield on Indian sovereign bonds.

And while sprucing up its rickety transport and power networks will allow India to supply more goods, richer countries could use investment in infrastructure to boost sluggish domestic demand.

Developed economies, though, appears to have outsourced the task of boosting employment and wages to their overworked central banks. Jaitley can’t go down the same route. The Reserve Bank of India will be unwilling to make deep cuts in interest rates unless the government can give a permanent boost to production capacity and put inflation on a lower path.

The big risk to Jaitley’s budget is from hot money. If U.S. interest rates start rising and investors judge India’s fiscal policy to be too lax, capital might flee as it did in mid-2013. With a little bit of luck, however, the rewards may be well worth the risk. Indian private companies are unwilling to undertake large infrastructure projects. The commercial and regulatory risks have ballooned in recent years, stalling projects and dragging down these companies’ borrowing capacity. Government-sponsored projects have a higher chance of completion.

After decades of neglect, India’s infrastructure is now appallingly inadequate by world standards. But if the country can sustain its big push to public investment, it might just become the West’s envy.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

India’s infrastructure push is the exception to the global norm. The government has decided to pursue a public investment-led growth strategy, even though it means going slow on fiscal correction. It’s an opportunity that rich nations, which can borrow far more cheaply than New Delhi, are missing.

A planned reduction in the fiscal deficit to 3 percent of GDP has been delayed by a year. Instead, Finance Minister Arun Jaitley promised in his annual budget to plough savings from cheaper oil into infrastructure. Roads and rail will be the big beneficiaries of a 26 percent boost to capital expenditure, the sharpest jump in five years.

There’s no question that India needs better infrastructure if higher growth rates are to be sustained. Yet some Western countries that are also in need of an upgrade can afford it a lot better. For governments in advanced nations, the cost of long-term borrowing is a fraction of the near-8 percent yield on Indian sovereign bonds.

And while sprucing up its rickety transport and power networks will allow India to supply more goods, richer countries could use investment in infrastructure to boost sluggish domestic demand.

Developed economies, though, appears to have outsourced the task of boosting employment and wages to their overworked central banks. Jaitley can’t go down the same route. The Reserve Bank of India will be unwilling to make deep cuts in interest rates unless the government can give a permanent boost to production capacity and put inflation on a lower path.

The big risk to Jaitley’s budget is from hot money. If U.S. interest rates start rising and investors judge India’s fiscal policy to be too lax, capital might flee as it did in mid-2013. With a little bit of luck, however, the rewards may be well worth the risk. Indian private companies are unwilling to undertake large infrastructure projects. The commercial and regulatory risks have ballooned in recent years, stalling projects and dragging down these companies’ borrowing capacity. Government-sponsored projects have a higher chance of completion.

After decades of neglect, India’s infrastructure is now appallingly inadequate by world standards. But if the country can sustain its big push to public investment, it might just become the West’s envy.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

India is taking a train ride back to the future. The country’s British rulers reaped massive productivity gains by building out the railways 150 years ago. Modernizing the dilapidated network could produce even better returns for Prime Minister Narendra Modi.

The government will spend $137 billion over five years expanding and sprucing up the ramshackle state-owned system, Railway Minister Suresh Prabhu said in his annual budget speech on Feb. 26. To see how ambitious the plan is, just look at the financing needs for the first year alone. Only about 60 percent of the $16 billion that Prabhu wants to invest in the year to March 2016 will come from taxpayers or rail users. Mobilizing the remaining $6.6 billion from investors will require considerable finesse.

However, if Prabhu can raise the money, the case for investing it is strong.

Railways accounted for almost a fifth of India’s per capita income growth between 1874 and 1912, according to a study by researchers at University of California-Irvine and Scripps College. A big chunk of this improvement came from productivity gains that were made possible by more efficient transportation.

A century later, the broader economy could do with another big leg-up from speedier transport. Journey times have shrunk in China with the arrival of high-speed trains. By comparison, India’s raw materials, finished goods – and people – move three times as slowly between labour-surplus hinterlands and port cities.

Lack of financing is not the only reason for systematic underinvestment in railways over the past several decades. A bigger culprit is politics. The pricing of rail services in India is completely lopsided. Successive governments have kept passenger fares artificially low and bumped up freight charges. They have also launched commercially unviable services, while doing very little to boost capacity on busy routes.

Any discussion about privatising the existing network remains off the table. The Modi government might at best lease out supporting infrastructure – like railway stations – to private concessionaires. But the $137 billion investment boost that the administration is planning requires a big jump in the railways’ efficiency. That might be just formidable a challenge as lining up investors.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Andy Mukherjee

SINGAPORE, Feb 25 (Reuters Breakingviews) – The Indian
government’s upcoming annual budget will be a test of just how
many big ideas Prime Minister Narendra Modi can squeeze into a
narrow fiscal space.

Curbing the federal deficit is the government’s absolute
priority on Feb. 28. New Delhi is desperate to revive private
investment, and the central bank has made it plain that it will
only cut interest rates if belt-tightening continues. The
medium-term target is to reduce the shortfall to 3 percent of
GDP in two years, from an estimated 4.1 percent. That means the
government must tighten its belt by at least half a percent of
GDP over the next 12 months.

But a squeeze on public spending won’t be enough. The budget
also needs to strike a radically pro-business note. Big-ticket
reforms, which can lift sagging corporate profitability and
revive animal spirits, will be crucial to boosting the
credibility of the government’s policies.

Investors’ confidence in “Modinomics”, while still high, is
starting to wane. Earnings at India’s top 100 companies by
market value suffered an unexpected 6 percent decline in the
last quarter – a big setback. Recently revised official
statistics claim that GDP growth has accelerated to 7.4 percent,
from just 5.1 percent two years ago. But lacklustre corporate
earnings, weak tax collections and subdued credit demand suggest
otherwise.

It’s true that companies are announcing many more new
projects than before. But for this to turn into a
self-sustaining cycle of higher investment, more employment and
greater consumer spending, Modi needs to step on the gas. Here
are the five most urgent reform priorities, ranked according to
the likelihood of their adoption.

Goods and services tax: Almost certain

The legislation to introduce a nationwide levy, which will
replace a plethora of sub-national taxes, is already in
parliament. The much-delayed measure is expected to come into
effect from April 2016. This reform would go a long way toward
unifying the small, fragmented markets of 29 Indian states. Both
manufacturers and consumers would benefit enormously.

Inflation targeting: Very likely

Another important change may be a revamp of the central
bank’s monetary policy framework. India was caught out in the
summer of 2013 when double-digit inflation and a sliding rupee
made foreign investors wary of financing the country’s large
current account deficit. That experience has convinced the
authorities of the need to stabilise expectations of future
price increases.

Reserve Bank of India Governor Raghuram Rajan wants a formal
inflation targeting mechanism. Finance Minister Arun Jaitley
might just give him the go-ahead. Well-anchored inflation
expectations would obviate the need for sharp increases in
interest rates. In the long run, growth would get a boost.

Investment sops: Likely

The government wants investment and jobs. It also wants its
flagship “Make in India” campaign to succeed. But it doesn’t
have the capacity to offer too many tax breaks. Even so, the
budget will probably select a few areas where it expects big
gains – railways and manufacturing of defence goods are the most
obvious candidates – and give some incentives to investors.

The consumer electronics industry could be another
beneficiary. With labour costs in China on the rise, India can
pitch itself as the world’s factory for assembling everything
from washing machines to mobile phones. Per capita income is now
high enough to generate domestic demand for these products.
Export-oriented supply chains can also take root, provided
manufacturers can bring in parts duty-free.

Last year’s closing of a Nokia mobile-phone factory near
Chennai over a tax dispute should serve as a wake-up call. The
budget offers the finance minister the perfect opportunity to
make amends.

Subsidy cuts: Likely

Investors would also like to see more evidence of a decisive
end to the previous government’s expansion of India’s welfare
state. Modi has been lucky so far: Thanks to a collapse in
global crude oil prices, consumer subsidies on fuel are likely
to be significantly lower.

But that still leaves food and fertilizer. Reducing
subsidies to farmers has proved politically knotty before and
won’t be any easier this time. But decontrolling the price of
urea, and paying farmers a liberal cash allowance linked to how
quickly they reduce their dependence on this overused
fertilizer, would be a welcome innovation.

Privatisation: Not very likely

Modi has so far shown little willingness to go further than
the previous administration when it comes to selling state
assets. The government’s only success has been in holding a
successful auction for coal blocks, although power producers
seem to have overpaid for the mines. The bigger worry is the
reluctance to sell controlling stakes even in very badly run
companies like Air India. Offloading some shares in
better-managed public sector companies is just a fiscal
expedient. Without any change in management, the economy doesn’t
benefit from enhanced productivity of labour or capital.

Such productivity gains are most urgently needed in the
financial system. Finance Minister Jaitley could transfer the
government’s majority stakes in state-controlled banks to a
newly created investment holding company. This is what an
advisory panel set up the central bank suggested last year.
Creating a sovereign vehicle to manage state assets would be a
sensible first step to eventual privatisation. Further
separating the management of state-run lenders from politicians
and bureaucrats could allow for more commercial logic in lending
decisions. The culture of leaving taxpayers permanently on the
hook for the losses of these banks would hopefully end.

Investors’ wish list from the budget is long. Then again,
there are reforms such as universal healthcare and old-age
pension that investors won’t like. But these will nonetheless
become necessary after the government has acquired the fiscal
muscle to shoulder the burden. That day doesn’t need to be in
the distant future. Indian workers and entrepreneurs are young.
They can share bigger gains with the state – provided Modi can
first deliver on his promise of showing them a good time.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Thomas Piketty has met pragmatism in Singapore’s higher tax rate for top earners.

The city-state has just announced that those taking home more than S$320,000 ($235,294) will pay a top tax rate of 22 percent from 2017, up from 20 percent today. Smaller increases will apply to earnings over S$160,000.

Singapore’s departure from three decades of progressively lower taxes for the wealthy is a nod to French economist Piketty’s polemic on inequality. It’s also a bet that the rich value clean air and social stability as well as money.

The government estimates the hike will bring in an extra S$400 million a year. State investor Temasek will also contribute by handing over as much as half of the expected real returns on its S$223 billion investment portfolio. The two measures combined are expected to boost revenue by the equivalent of 1 percent of GDP annually over the next five years. This should cover a planned ramp-up of investment that includes more hospital beds for an ageing population, as well as a new airport terminal.

Ten years ago, the Singapore’s preferred choice would have been to raise its goods and services tax. Levies on consumption are easier to collect and less flighty than the incomes of high-earning expatriates. But that option is now politically infeasible. The People’s Action Party, which has ruled Singapore throughout its 50-year history as an independent nation and must call an election by January 2017, is wary of upsetting voters.

What’s more, Singapore’s rich don’t have many attractive alternatives. Even at the higher rate, someone earning S$1.5 million will still pay less than 20 percent of their overall income in tax. Hong Kong takes an even smaller slice. But the rival financial centre has worse pollution and faces increased social unrest caused by China’s tightening grip.

The bet is that Singapore’s wealthy will sacrifice a few extra percent of their income for what remains a stable and safe low-tax haven. In a vastly unequal society, the elite could hardly have hoped for a less strenuous marriage of Piketty and pragmatism.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Bank of Japan has set out on a difficult journey. The central bank can only reach its destination of 2 percent inflation if consumers spend, workers produce and investors remain calm. Missing any of the three signposts could lead Japan astray, as a new Breakingviews calculator shows.

The interactive tool builds on economist Milton Friedman’s idea that inflation is “always and everywhere a monetary phenomenon.” But monetary policy can’t be gauged just by looking at how the economy is doing at present. The longer-term context matters. Higher productivity means people expect bigger pay checks; confident consumers spend more. An ageing population, on the other hand, is inherently deflationary. Monetary policy must respond to changing conditions. Applying that idea to Japan, the road to 2 percent inflation looks bumpy – but not impossible.

Start with interest rates. The BOJ’s huge bond-buying spree has crushed yields: 10-year government debt currently pays investors a measly 0.38 percent a year. Yields will rise as inflation takes hold and the BOJ gradually scales back its purchases. But as long as the yield doesn’t rise above 2 percent the target inflation rate could be hit and maintained.

Of course, if the BOJ is successful and inflation rises, investors could reasonably demand more than a zero percent real return for lending to the state. Much depends on what happens elsewhere. If risk-free rates in other developed nations, particularly the United States, are low, and the yen is expected to appreciate, investors might still be tempted. But as the U.S. economy strengthens, and real returns on dollar-denominated assets improve, the BOJ could get trapped into permanent monetary easing. Only a ridiculously cheap yen, engineered by hyper-aggressive money-printing, would keep Japanese assets attractive.

There is another way to keep yields low, however: the BOJ could promise never to sell the bonds it has already bought. Plus, the Japanese government could curb its high budget deficits so that the supply of available debt securities drops faster than demand. This combination of “helicopter money” and fiscal rectitude would keep a lid on yields.

Low interest rates alone won’t get the BOJ to its destination, however. Households must also be willing to spend at least 80 percent of their income. Japanese consumers are showing early signs of optimism: the spending propensity was 82 percent until November last year. If the measure returns to its 20-year average of 78 percent, however, core inflation will slide.

Households have greater spending confidence if their incomes rise. For lasting wage gains, workers must become more efficient. But boosting the pace of productivity gains could be an uphill struggle. In the 1980s, Japan’s worker productivity grew at an annual average rate of 3 percent. This slowed to 1 percent in the 1990s, and to 0.8 percent in the last decade.

The calculator assumes average productivity growth of just 0.4 percent annually, or 2 percent over the next five years. That’s just as well, because ever since Prime Minister Shinzo Abe was elected in December 2012 on a pledge to end deflation and reinvigorate the economy, Japanese companies have only hired non-regular workers. This has implications for productivity because companies skimp on training the non-regulars. Abe’s pledge of labour market reforms, including allowing more foreign workers, has yet to change corporate behaviour.

Additionally, a planned second increase in Japan’s sales tax rate, which has been delayed to April 2017, could crater demand. That’s what happened after the first tax hike last year. The International Monetary Fund’s current forecast is for the Japanese economy to operate 0.2 percent below its potential in 2017. If that gap widens to the estimated 2014 level of 1.6 percent, inflation will fall.

Rapid ageing also complicates the BOJ’s journey. A greying society has fewer profitable investment opportunities, and a low appetite for credit. Even a slight uptick in real interest rates can make borrowers turn tail, leading to a deflationary savings glut. If the population shrinks faster than the annual 0.2 percent pace expected by the calculator, inflation will lag.

Contrary to what some sceptics believe, Japan should be able to achieve 2 percent inflation if consumers keep spending, workers become slightly more productive, and investors don’t lose their nerves. Nevertheless, the road will be long and far from straight. To see if Japan is moving in the right direction, a map will come in handy.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japan’s economy has dragged itself out of recession, but the country’s limp job market is hobbling the recovery. While money-printing can further weaken the yen and boost exports, stronger domestic demand depends on creating more full-time, well-paid jobs.

Gross domestic product expanded at a 2.2 percent annualised rate in the final three months of 2014, reversing two straight quarters of declining output. However, the revival was weaker than expected. Economists surveyed by Reuters had forecast growth of 3.7 percent.

A third of the expansion came from increasing net exports. By contrast, domestic demand – which plunged after the government hiked the sales tax last April – remains weak. Despite a 60 percent increase in the Bank of Japan’s quantitative easing programme in October, private non-residential investment barely grew. Spending on new homes declined, and consumption growth was flat.

Much of the blame lies with Japan’s fractured labour market. Since Shinzo Abe was elected prime minister in December 2012, the ranks of temporary and part-time employees and short-term contract workers – have swelled by more than 10 percent. Better-paid, full-time jobs have shrunk by 1 percent.

Reforming Japan’s crusty labour laws should give those non-regular employees greater job security, encouraging them to demand higher wages – and spend the proceeds. However, companies will continue to resist change, viewing any interference in hiring practices as a raid on their profitability. As a short-term demand palliative, Abe may need to boost government spending instead.

Japanese stocks rose after the GDP report, as investors bet that the weaker-than-expected recovery will eventually force the BOJ to reach for an even bigger stimulus package. But more yen-printing on its own is highly unlikely to translate into faster wage growth.

Japanese worker productivity has slowed over the last two decades. Overdependence on poorly trained non-regular workers could bring efficiency gains to a standstill, in turn making employers even more reluctant to raise wages. The GDP report is a reminder that a limp recovery is becoming immune to monetary medicine. Unless Japan’s labour market is fixed, the remedy might lose all its potency.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japan’s economy has dragged itself out of recession, but the country’s limp job market is hobbling the recovery. While money-printing can further weaken the yen and boost exports, stronger domestic demand depends on creating more full-time, well-paid jobs.

Gross domestic product expanded at a 2.2 percent annualised rate in the final three months of 2014, reversing two straight quarters of declining output. However, the revival was weaker than expected. Economists surveyed by Reuters had forecast growth of 3.7 percent.

A third of the expansion came from increasing net exports. By contrast, domestic demand – which plunged after the government hiked the sales tax last April – remains weak. Despite a 60 percent increase in the Bank of Japan’s quantitative easing programme in October, private non-residential investment barely grew. Spending on new homes declined, and consumption growth was flat.

Much of the blame lies with Japan’s fractured labour market. Since Shinzo Abe was elected prime minister in December 2012, the ranks of temporary and part-time employees and short-term contract workers – have swelled by more than 10 percent. Better-paid, full-time jobs have shrunk by 1 percent.

Reforming Japan’s crusty labour laws should give those non-regular employees greater job security, encouraging them to demand higher wages – and spend the proceeds. However, companies will continue to resist change, viewing any interference in hiring practices as a raid on their profitability. As a short-term demand palliative, Abe may need to boost government spending instead.

Japanese stocks rose after the GDP report, as investors bet that the weaker-than-expected recovery will eventually force the BOJ to reach for an even bigger stimulus package. But more yen-printing on its own is highly unlikely to translate into faster wage growth.

Japanese worker productivity has slowed over the last two decades. Overdependence on poorly trained non-regular workers could bring efficiency gains to a standstill, in turn making employers even more reluctant to raise wages. The GDP report is a reminder that a limp recovery is becoming immune to monetary medicine. Unless Japan’s labour market is fixed, the remedy might lose all its potency.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Andy Mukherjee

SINGAPORE, Feb 10 (Reuters Breakingviews) – The upstart
Common Man Party has regained power in Delhi a year after its
first brief rule. For now, that’s a minor embarrassment for
Narendra Modi. But if his rival’s left-wing rhetoric gains
national traction, the prime minister may have to rethink his
pro-business policies.

Full view will be published shortly.

CONTEXT NEWS

- Arvind Kejriwal’s “Aam Aadmi” or Common Man Party appeared
to be heading for a landslide victory in the state election for
Delhi. At 11 a.m. in New Delhi (0530 GMT), it was leading in 66
out of 70 assembly seats, India’s Election Commission said on
its website.

- The Bharatiya Janata Party, led by Prime Minister Narendra
Modi, lost its bid to form a government in the state that houses
the nation’s capital. Modi said on his Twitter feed that he had
congratulated Kejriwal on his victory and assured him of
“complete support in the development of Delhi.”

The Reserve Bank of Australia on Feb. 3 lowered the official cash rate by a quarter of a percentage point to 2.25 percent. The move was not at all anticipated by futures markets just 10 days ago, but was mostly priced in by the time Governor Glenn Stevens announced the decision. Even so, the Australian dollar slid almost 2 percent against the U.S. dollar.

After India and Singapore, it’s the third time a central bank has eased monetary policy in Asia-Pacific in less than a month. Stevens’ remark that the Australian economy is “likely to be operating with a degree of spare capacity for some time yet” leaves the door open to further reductions.

While a more competitive exchange rate and lower interest rates are undoubtedly appropriate for a resources producer like Australia, which is feeling the pinch from falling commodity prices and slowing Chinese demand, even importers of energy and minerals in the region risk falling behind the curve by delaying rate cuts.

The global deflationary pandemic has reached Asian shores. From Sydney to Seoul, the combination of declining real GDP growth and rising real, or inflation-adjusted, interest rates has become a major headache. Indeed, average growth in the region is now trailing average real borrowing costs. For investors, Asia’s relative appeal is fading rapidly when compared with an improving U.S. economy.

Asian policymakers outside Japan have plenty of monetary medicine saved for a day like this. It’s time to administer it. While it’s possible that the region will recover some of its lost vigour as U.S. consumers feel more comfortable about spending on imported goods, it’s quite likely that anaemic demand from China and Europe will more than cancel out the boost.

Lower rates could have the side effect of further stoking burning-hot property markets, as in some Australian cities. So the authorities need Singapore-type macroprudential regulations on borrowers and lenders to cool things down. Revival of investment and output is the biggest priority for Asian central banks this year, and urgent rate cuts their best bet.